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Analysis file Dossier : Business and conflict, business and peace.

Grenoble, 2008

Somali business

Private sector development in a stateless

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Introduction

On January 29th 2008, an UN-backed meeting entitled “The Private Sector: a Tool for Peace in Somalia” took place in Sharjah (United Arab Emirates). It was organized by the United Nations Political Office for Somalia UNPOS. Among the participants, there were eminent business people from Africa, the Middle East, Europe, US as well as Somalia’s leading businessmen. The meeting’s aim was to assess the economic situation in Somalia and the opportunities that could allow the country to move from a war to a peace economy.

The participants came to the conclusion that although the Somali economy has been in stagnation, it is today still stronger than that of many other countries in Africa – in terms of economic indicators such as GDP, imports and exports. Besides, the businessmen identified a wide range of economic sectors likely to boost Somalia’s economy, notably livestock and livestock products, agriculture, money transfer, telecommunication, infrastructure, oil and gas, mining, transport and tourism. What does that show?

Although Somalia has been without an effective government for more than 15 years, its economy is functioning well. It seems to be surprisingly stable – in stagnation, but stable, while it is mostly based on the private sector.

In this paper we will try to analyze the specificities of Somali economy, which is the transition from a war economy based on plunder to a service-based economy. When and to what extent did this shift in Somalia’s economy happen? Can we characterize the changes that happen as development? Is it a good response to the difficulties the civil society has to face, or is it the lesser of two evils?

Firstly, through an analysis of the current figures, we will show that this recently constructed economy needs some improvements so as to fulfil the basic needs of the Somali population. Then, after explaining the War economy that has hit Somalia since the collapse of the Somalia regime in 1991, we will underline the shift from this economy of plunder towards an economy essentially based on the private sector.

I. Today’s Somali Economy

One has to note that it was extremely difficult to find both reliable and recent figures concerning the present Somali economy. In general, one can say that “Somalia has maintained a healthy informal economy, […]. Statistics on Somalia’s GDP, growth, per capita income and inflation should be viewed sceptically […].” Indeed, figures alone should not be taken too seriously, as they do not reflect the reality, but simply an average which does neither take into account any inequalities, nor the gap between the rich and the poor.

Indicators : GDP (billion $US)
1996 : 1
2004 : 4,6
2007 : 5,575

Indicators : GDP per capita ($US)
1996 : 176
2004 : 600
2007 : 600

Indicators : GDP – real growth rate
1996 : -
2004 : - 2,4 %
2007 : 2,6 %

Indicators : GDP (composition by sector Agriculture Industry Services)
1996 :65 %
2004 : 10 %
2007 : 25 %

The table gives an overview of how Somalia’s GDP has developed within the past 10 years. Further indicators such as Somalia’s inflation rate, which might also be interesting to analyse, are not available, as businesses tend to print their own money. The unemployment rate, too, cannot be determined. We will therefore focus on the available data in order to draw a picture of Somalia’s economy. In fact, GDP has grown from around 1 billion $US in 1996 up to more than 5.5 billion $US in 2007, the GDP per capita as well as the real growth rate being stable in recent years. Besides, we can see from the GDP’s composition that the primary sector with 65% is still largely dominant. Industry sector only accounts for a weak 10%, whereas services contribute to 25% of GDP.

This brings us to the structure of the Somali economy. As we have seen in the table below, it is traditionally based on agriculture and livestock, which also represent the main exportable commodities. Other economic sectors are almost inexistent. There is a low exploitation of resources and minerals; the manufacturing sector has been destroyed during the civil war and tourism industry cannot develop under conflict circumstances. A few light industries include sugar refining, textiles or wireless communication.

Two important sectors have emerged during the civil war, which are the remittance and the telecommunication sector. The remittance or hawala sector is a system handling the transfer of revenues coming from the Somali Diasporas all over the world. It accounts for an estimated 1 – 1.5 billion $US/year. Such money has of course been used for development purposes, but, not only due to the lack of controls. The telecommunication sector in Somalia has become one of the most sophisticated on the continent, covering almost the entire country with its three independent providers.

II. The War Economy

Since the collapse of Siad Barre’s regime in 1991, Somalia has been functioning without a state, gradually descending to anarchy and chaos. This led a large amount of non-state actors seeking power to gain control over Somalia. The role of warlords and their power upon the Somali economy is indeed crucial to understand the war in Somalia. In the first years of the conflict, warlords, i.e. mostly former major army officers, started to get into criminal activities such as looting and the destruction of properties. International aid that has been sent at the beginning of the Civil War has also been massively diverted by these groups so that they can pursue these activities.

Most of the economic sectors deeply suffer from these activities, and most of them simply did not function anymore. It was a war of all against all. Warlords, and businessmen (warlords and businessmen more than once belong to the same category) abused the absence of the state in Somalia to get the control over the population. They developed their own sets of rules so as to serve their own interests, i.e. the maintaining of their power through the funding of a continuing war. Through the examples of the main Somali sectors (livestock, charcoal, bananas, and maritime industry), we will see how business is led by warlords.

A. The dispossession of lands

One of the main issues Somali people had to face was of course the problem of land property. The access to land was the prerogative of militias. “In the past, land was seized with the pen, today, land is seized by gunpoint” said a woman interviewed in a Report from the Earth Institute of the Columbia University.

Land dispossession was one of the many factors that prevent the civilians from enjoying the potential benefits of their resources. Indeed, Somali people relied a lot on livestock exports. From 1998, the situation got even worse. The boycott from most of Somalia’s trading partners (Yemen, United Arab Emirates) because of the supposed contamination of the meat actually compelled the existing pastoralists to find new alternatives.

But, not only did warlords control the land, they also set up taxation systems and got control over the main transportation arteries, so as to generate income to finance the war. In the early 90’s, the main sectors of Somali economy actually suffered from this prerogative of force.

B. The charcoal sector and the illegal taxation system

The example of charcoal exploitation is, in this sense, quite relevant. Charcoal exploitation began in 1997, when it became profitable to make profit out of mining. Even if charcoal exploitation has been made possible because of the cutting of acacia forests in the south of Somalia, causing heavy environmental damages, exploiters of charcoal could actually make profit out of mines, and could sell it at a reasonable price for exports. The main issue is that charcoal has to be transported to the main harbours, in order to be exported to countries like United Arabic Emirates or Saudi Arabia.

Unfortunately most of warlords and clans detain power over the commercial arteries in the country. The transport is then really expensive to forward any kind of goods to other markets. Indeed, warlords apply taxes on the transportation, therefore reducing the margin producers can make. Other costs such as the payment of a middleman (intermediary) or clan based taxes (when goods are transported on clan territories) also increase the cost of the transportation. The money collected by warlords will be used again to buy weapons.

C. The banana sector and the protection money

Another example would be the one from banana trade. In this case, there were disputes between two major companies, an Italian company De Nadai and an American company Dole, on the exploitation of banana fields in the South of Somalia. Both have Somali subsidiaries, and a hard competition began between both companies. Systems of alliances and the building up of militias for both parts escalated the conflict. Indeed, warlords and local clans could provide for the security of the activities for both companies, but in exchange for money. Besides, on the same basis of charcoal exploitation, banana movements were submitted to taxations from the fields to the harbours. The money therefore raised could serve the increasing power of warlords instead of serving the populations interests and to promote better conditions for everyone.

Through these examples, we can see that Somali traditional sectors could have served the development of the country, in the sense of human development, because the revenues could have been used to fund health and educational infrastructures. The same argument can be applied to other examples such as the maritime business (piracy, fishing licenses granted to foreign fishermen, and protection of illegal fishermen in exchange for security, control over the goods in harbours), or the remittances business (Diaspora money used to fund clan based conflicts or militia). All of these sources of revenue have been constantly diverted by warlords to finance the war.

D. The Qat trade: a way to control the population

Another specific example of the link between business and conflict in Somalia is Qat trade. Qat trade is one of the most relevant examples, when analyzing the war economy as a pillar of the conflict. Qat is a plant inducing euphoria and stimulation, and its trade has been developing a lot since the beginning of the conflict for two reasons.

Firstly, Qat it is a means to have a control on the population and on the militias. Qat consumption has a double purpose. On one hand, Qat is consumed by militias to help them reduce their fatigue and fear of fighting. This helps them to kill without feeling remorse. On the other hand, male civilians, i.e. people who don’t fight, consume it so as to remain calm, and face the horrors of the war. Because of this trade, warlords benefit from revenues both from their own militias, but also from the civilians themselves. Qat consumption is then a vicious circle, and it is really hard to escape from it. Though women don’t consume it, they are also taking part in that trade, and are in charge of selling it on the market.

Indeed, Qat trade was (and still is) an incredible source of revenue for warlords. Although Qat is imported from Kenya, it is estimated that each aircraft coming inside the country generates around 170 000 $ shared between warlords and air carriers. Around 6 aircrafts are scheduled each day around the country to supply the population. Monthly consumption is estimated at 10$ a month, which is incredibly high for a population suffering from the drought and famine. Selling Qat is a way for warlords to finance the buying of weapons. Qat trade has been tremendously developing after the collapse of the state, and along with Qat, these aircrafts are sometimes used to inject arms inside the country.

Before pointing out the role of the arms trade in the war economy, we will give a short overview of Somali’s economic current import/export facts. Comparing Somalia’s exports and imports, one can say that imports with around 798 billion $US largely exceed exports with around 300 billion $US. The main exportable commodities apart from livestock are bananas, fish, hides, charcoals and scrap metal. Somalia’s basic export partners are the United Arab Emirates accounting for 49.6% of all Somali exports, Yemen (21.4%) and Oman (5.9%). When it comes to imports, main commodities are manufactures, petroleum products, food, construction materials and qat. Somalia’s most important import partners are Djibouti (30.8%), Brazil (8.5%), India (8.2%) and Kenya (8.1%). But these traditional trading partners are not only exchanging legal goods.

E. The arms trade

The arms trade, as we have seen in the previous examples, plays a major role in Somali’s conflict. It is indeed one of the deepest causes of it. Firstly, during the Cold War, the two superpowers have sold a large number of light weapons to Africa, which have been served in many conflicts all around the continent. Somalia was not an exception, and indeed absorbed such influxes of arms.

In January 1992, the UN Security Council agreed on a resolution, imposing an embargo on the trade of arms in and outside Somalia. Unfortunately, the will of the United Nations was not sufficient, precisely because Somalia did not have a State, and no control could be achieved on the weapon trade. Weapons were still pouring in the country mostly from countries like Ethiopia, Yemen, Eritrea, and UEA.

There are different reasons why these countries sell Somalia weapons. Most of all, the demand of arms in Somalia is superior to the offer. Therefore, Somalia represents a very interesting and lucrative outlet. Some of these countries had interest in the conflict and wanted to support Islamist groups in Somalia. The United States were also unofficially accused of selling weapon to Somali people in exchange for information about Al-Qaïda.

In this context, it is really easy to find weapons in Somalia. Light weapons are especially popular on markets because they are handy and easily transportable. Weapons can be sold to anyone, even to children, which encouraged violence at an early stage.

Through these different aspects of the war in Somalia, we already have clues about the economic sources of the conflict. There are two types of factors that have fuelled the conflict and still continue to do so.

Internal factors such as warlords’ domination upon infrastructures (roads, harbours, airports) which enable them to apply a system of taxation. There also external factors such as the input of arms, the Qat trade, or the competition over resources. Most of all, the traditional economy of Somalia has been devastated by these factors. However, the development of other sectors might carry Somalia out of poverty. Indeed, carjacking, looting, and after, systemic instability, has had too many bad effects on the Somali economy.

Around 1995, a private sector in Somalia started to rise, and to gain power, whereas the industry and agriculture was weakened by ongoing looting. The private sector was another way for the development of Somalia. Businessmen in these sectors indeed started to become more powerful than traditional warlords. Little by little, these types of businessmen realized that war was not as beneficial as before. A need for stability emerged changing the economic interests throughout the years.

III. The Private Economy: a service-based economy

According to the Report “Warlords and Landlords: Non-state Actors and Humanitarian norms in Somalia” from Ken Menkhaus, there has been a gradual shift from the war economy of the 1990’s to a quasi-legitimate trade (import/export, telecommunication, transports…) of the beginning of the 2000’s. Service sectors in Somalia are now more developed than in other countries, though Somalia remains one of the poorest countries in Africa. According to the World Bank, the development of such private sector should play a major role in the conflict de-escalation, and should encourage clans to cooperate with each other. What are these sectors and do they really helped the development of the country?

In this chapter, we will point out how the private sector has experienced a boom. The War economy could function for a while but the growing lassitude of businessmen throughout the 90’s revealed the limits of this type of economy.

In the absence of a government, the Somali private sector has indeed been very inventive in regulating and stabilising its transactions – for instance by using foreign jurisdictions or institutions. In those domains where transactions are rather simple – such as the construction or retail industry – competition is vivid and market forces therefore regulate the prices. In more complex domains, private enterprises have acquired three methods in order to compensate for the lack of effective government regulation. The first one is to “import governance” by relying on foreign institutions. This has been the case for areas such as airline safety, currency stability and company law. Furthermore, the private sector has been using networks of trust, notably clans, in order to help them with contract enforcement, payment, and transmission of funds. Finally, businesses have worked towards simplifying basic transactions so that they can be carried out without any help from outside.

The following sectors have become particularly important within Somalia’s economy: aviation, telecommunication and remittances. In the following, we will take a closer look at each of those areas.

A. The aviation sector

Currently, Somalia disposes of 67 airports, but only seven of them have paved runways. Somalia’s major airport is the international airport of Mogadishu. Until 1992, Somali Airlines held the monopoly in the aviation industry, offering just one international destination using its one aircraft. It used to be the country’s national airline which had been founded in 1964. Civil war led to the cessation of all flights and it has been defunct ever since. Nowadays, 15 companies are operating in Somalia, accounting for more than 60 aircrafts offering six international destinations. There is desperate need to get air transportation services to Somalia. This obvious demand comes from both the Somali Diaspora who wants to have access to its country and Somalia’s society which needs aviation for pilgrimage to Mecca. This need has encouraged the foundation of private airlines. Jubba Airways for instance is one of the biggest airlines in Somalia. It was founded in 1998 and replaces former national Somali Airlines. It was the first company to offer direct flights to the United Arab Emirates (Dubai, Sharjah) and to Jeddah, which is the principal gateway for Mecca. It is also the only airline based in Mogadishu. Damal Airline and Inter-Somalia are both based in Dubai. Those companies operate basically with leased Russian aircrafts, offer both passenger and cargo flights, and have agencies all over the world, which helps the large Diaspora and also multinational companies, private entities and governmental agencies to travel to Somalia. But, it is not proven that the development of the airlines sector really covers an essential need, even if it has helped the Muslim population to live their faith. It might have also served the increase of business activities and the enrichment of businessmen.

B. The telecommunication sector

Coming to telecommunication, Somalia enjoys extraordinary wireless services in most major cities. There is a vivid competition in the telecommunication sector which makes that firms offer the lowest international call rates on the continent. The Somali Telecom Group is the biggest operator and calls himself “Somalia’s first regional developer”. The group was founded in 1997 by the Somali entrepreneur Abdirazak Osman, together with American businessmen and in partnership with local actors. He is a shining example for those who have taken full advantage from the lack of government in Somalia. According to him, “the collapse of the government encourages business […] it is better without government […]. Before, public monopolies, bureaucracy and corruption were prevailing, and wealth could only be created in Mogadishu.” It is true that telecommunication boosts economic activities, but the most important task telecommunication companies fulfil is that of social cohesion. Thanks to telecommunication, families can stay in touch with their members, within or outside Somalia. But, as a journalist Anna Husraska from the newspaper Tygodnik Powszechny puts it, “The Somali population indeed disposes of mobile phones but many of them have absolutely no access to water or to sanitary infrastructures”. The benefits of the telecommunications’ development have therefore limits.

C. The remittance sector

Last but not least, the remittance sector, too, has emerged and become one of the most important economic sectors in present Somalia. There has been a boom of money transfer companies, which is due to the absence of a formal banking system in the country. The most important one is Dahabshiil Financial Services Inc. with its 400 agencies in 34 countries all over the world. Amal Express, Al-Mustagbal Express, Dalsan Trading and Towfiiq also belong to the well-known money transfer companies. Apart from Dahabshiil Financial Services Inc. which is based in Somali-land, the others are all based in Dubai. This sector has a huge and incomparable economic impact, with a cash flow of about 1-1.5 billion $US per year, coming from the Somali Diaspora. The system simplifies trade between Somalia and the rest of the world and helps Somali families to survive. According to a recent UNDP survey, more than 25% of the Somali families receive such payments and depend on them for their livelihood. Of course, the question of the use of those funds comes up. Officially, they are used for all kinds of necessities, such as buying food, clothing, for small investments like purchasing land parcels or a house, creating small businesses. But as it is an informal sector, those are just estimates. In particular since 9/11 and in the context of terrorism, there are increasingly concerns about the use and potential misuse of those funds.

Conclusion

Looking at GDP, imports, exports, the Somali economy seems stable and developing; the lack of government has boosted private sector initiatives and contributed to a positive development which would not have taken place under other circumstances. But the sectors which have boosted are not the vital ones, the ones the population could benefit from, but purely the more lucrative ones from an economic profit-based point of view.

There, we should make the distinction between development, in the sense of human development, and economic growth. Sure, Somalia have known good results in sectors such as telecommunication, money transfer companies, or airlines, but depending on the situation, it both fuels the conflict between people and helps them to get out of it. Regarding the infrastructures, the Somali road system is limited and in poor condition (for a private supplier to build a road and collect fees to cover the costs is apparently too hard, partly because of prohibitive transaction costs and partly because fee-paying users are not the only ones who benefit from roads.

Primary education is another disappointing story. Some 71 percent of primary schools are privately owned (typically by parents or communities), but enrolment is just 17 percent. Public goods or to private goods with strong spill over effects—roads, monetary stability, a legal system, primary education, a cross-border financial system—does the state seem to be sorely missed.

Somali people as well as Somali businesses need now more than ever the infrastructures to help them out of poverty. The shift towards a service-based economy gives now chances for the population to develop the former traditional sectors of Somalia (livestock, bananas, etc.) as well as other sectors in the scope of long term development.

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